Why does the Bank of England change its base interest rate?published at 11:10 GMT
The Bank of England wants inflation in the UK to be 2%. If inflation is above that, the Bank will typically raise interest rates.
The idea behind this is if borrowing is more expensive, people spend less money and demand for goods and services goes down. That will (ideally) bring inflation down.
But high interest rates can harm the economy as businesses hold off from investing in production and jobs.
For example, homeowners face higher mortgage repayments, and businesses may borrow less, meaning they may not create jobs.
In recent months, inflation has remained above the Bank’s target at the same time as the economy has remained relatively flat and the jobs market has softened.
While inflation rose to 3.4% in the year to December, unemployment – at 5.1% – is at its highest rate since early 2021.
When the Bank’s Monetary Policy Committee meets to make decisions on the base interest rate, it can choose not to raise or lower it. This is known as ‘holding’ the interest rate.